The Aussie dollar gets the high-low

Ouch both times. Aussie stocks got hit by the old "high-low" overnight. The "high-low" is a gridiron technique where one man tackles you high and the other tackles you low. The net result is that you get smashed. Granted, a four percent decline in the Aussie dollar versus the greenback doesn't quite constitute a smashing. How bad, then, is the double-helping of unsettling news?

First China. The People's Bank of China raised interest rates for the first time in three years. It wasn't a big hike. One year lending rates were raised to 5.56% from 5.31%. But it was enough to remind markets that demand for Aussie commodities depends on China's continued expansion; an expansion largely fuelled by bank lending and fixed capital (real estate and infrastructure) investment.

Rate hikes...increased reserve ratios...you get the idea that China's central bankers are on bubble alert. That was probably enough to spook some traders to take profits in the raging Aussie dollar. But in our view the bigger factor on the Aussie came from America overnight. The mortgage crisis is becoming a big stink ball.

The Dow fell by nearly 1.5% points and below 11,000. Gold fell. And the banks stocks fell. Especially Bank of America (NYSE:BAC), which fell by almost five percent. Why? The news came near the close of the market, and it was menacing. Bank of America is being cornered by investors in its securitised mortgages to buy them back.

 "Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York are seeking to force Bank of America Corp to repurchase soured mortgages packaged into $47 billion of bonds by its Countrywide Financial Corp. unit, people familiar with the matter said," leads the Bloomberg story. Uh oh.

Investors in mortgage securities are playing their hand now (presumably to get something out of BAC before something worse happens to the band and its nationalised because it's too big to fail). The investors are claiming that the bonds, originally issued by Countrywide Financial, which Bank of America acquired, have not been serviced properly.

This is largely a legal claim. And that was made clear when Kathy Patrick,  a lawyer representing the bond holders, appeared on CNBC later in the day and said, "We want to enforce the holders' contract rights...Today's action begins the clock ticking ... If these issues of non-performance are not addressed and cured, then our clients will be able to enforce their rights in court."

"There were representations made to my bond holders when they purchased these securities. They are contractual representations about the credit quality of these mortgages...and my clients are concerned that the mortgages in question did not, at the time they were securitized, conform to those representations."

That sounds like a fancy way for the bondholders to tell Bank of America, "You lie!"

For its part, Bank of America says it can't be blamed for a lousy economy and deadbeat borrowers. But the vultures are already circulating and figuring out how much all this is going to cost the company. And remember, what's true for this bank is probably true for three or four other major American banks that sold (or bought companies that sold) hundreds of billions of dollars worth of securitised mortgage.

What's perplexing is why the New York Fed is putting the screws to BAC. Normally, the Fed's job is to find a home for troubled bank assets and prevent a crisis at any one large firm (except for Lehman, which everyone in New York hated for not participating in the LTCM bailout). Granted, the NY Fed owns some of the securities in question. But would it really take action that could produce a crisis in a major bank?

Probably not. We agree with our colleague Kris Sayce on this one. First, the current political environment suggests that the major banks are simply too big to fail. It could be the Fed is trying to soften up the banks for a GM-style takeover by making them appear evil/weak/incompetent.